OPEC+ meeting postponement raises talk of a ‘rift’ among oil producers

The postponement “indicates difficulties within the OPEC+ group to reach an agreement to cut production,” Jorge León, senior vice president of oil markets research at Rystad Energy, said in emailed commentary. 

“Every member country acknowledges the need to reduce output to support prices into 2024,” he said. “The question is how to share the burden of this.”

Read: What’s at stake for oil prices as OPEC+ delays closely watched meeting

At the last OPEC+ ministerial meeting in June, the group left its production cuts in place to the end of 2024.

Saudi Arabia pledged to voluntarily reduce its oil output by an additional 1 million barrels a day starting in July and Russia said it reduce its oil exports by 300,000 barrels a day, with both extending their cuts to the end of this year.

OPEC+ did not provide reasons for the meeting delay, but that hasn’t stopped the market from “speculation that there might be a rift between some of the members,” said Fawad Razaqzada, market analyst at City Index and FOREX.com.

Saudis bear the burden

Saudi Arabia, as the largest oil producer in OPEC, has often bore the brunt of the burden when it comes reducing oil production to tight supplies in the global market and lift oil prices.

The postponement and the “supposed rancor within OPEC+ draws attention to the challenge that the Saudis have,” Tom Kloza, global head of energy analysis at OPIS, a Dow Jones company, told MarketWatch.

The situation is “reminiscent of the issues that surfaced in November 2014,” he said.

WTI crude prices dropped by nearly $30 a barrel between late November 2014 and mid-January 2015 after OPEC left its output quotas unchanged despite calls among some members to reduce production amid forecasts for a glut in global supplies.

The Saudis earlier this year took their production down to the lowest it had been since mid-2021, Peter McNally, global sector lead for Industrials Materials and Energy at Third Bridge, told MarketWatch. “It was a decision that they made unilaterally and did not demand that other OPEC members go along with that.” 

The result of that has been a “loss of market share, but revenues have been fairly stable because prices did respond positively,” he said.

U.S. and global benchmark crude futures had climbed to intraday highs for the year on Sept. 28 but have declined by 15% or more from those highs, as of Tuesday’s settlement.

On Wednesday, January West Texas Intermediate crude
CL.1,
-0.45%

CLF24
fell 0.9% to settle at $77.10 a barrel on the New York Mercantile Exchange, while December Brent crude
BRN00,
+0.05%

BRNF24
lost 0.6% to $81.96 a barrel on ICE Futures Europe, though both finished off their session lows.

Given the steep price decline from the year’s highs, “it may take additional cuts to balance the market, particularly in a period when demand is seasonally weak,” said McNally. “If further cuts are required, our experts would expect broader participation than just the Saudis.”

Meanwhile, Razaqzada said the delay also raises the risk that the Saudis remove its voluntary cuts that have ben in place since July.

But who can blame them? “You would be very annoyed if you are voluntarily cutting output beyond the agreed limits, when others are not backing you up,” said Razaqzada. So, Saudi Arabia will “want to hear some assurances that moving forward, the rest are complying sufficiently in order to keep prices stable.”

United front

Still, it would be hard to deny that the delay has in the very least intensified the challenge faced by OPEC+ to reach a balanced supply and demand market for oil, especially given demand uncertainty.

“This probably means there is some arm-wrestling going on to get a united front,” as the group attempts to achieve total agreement on more output cuts, said Stewart Glickman, energy equity analyst at CFRA Research. 

Some downbeat economic data have pointed to the potential for a slowdown in global energy demand. Data Wednesday showed U.S. orders for durable goods dropped by a larger-than-expected 5.4% in October.

However, OPEC raised its forecast for 2023 oil demand growth earlier this month to 2.5 million barrels a day, from he 2.4 million barrel-a-day forecast in October.

That demand forecast was “pretty bullish,” so the OPEC+ members may have “boxed themselves into a corner,” Glickman said. “Some OPEC participants could reasonably say: why do we need more cuts if our demand outlook is rosy?”

Decision making

As for the outcome of the meeting, the postponement has apparently led to shifts in market expectations.

The CME Group’s OPEC Watch Tool, which calculates the probability of certain potential outcomes for the next OPEC meeting, hasn’t updated the meeting date on its chart, but as of late Wednesday afternoon, showed a Nov. 26 outcome probability of 76.56% for no change to production levels.

Early Wednesday shortly after the OPEC+ meeting postponement was announced, that probability fell to 36.75% from 65.88% on Tuesday afternoon.

“Reaching a new agreement to cut production will prove to be challenging,” said Rystad’s León.

The 2024 production quotas decided in June 2023 included a lower production target for nine of the 23 member countries, which are Russia, Nigeria, Angola, Malaysia, Azerbaijan, Equatorial Guinea, Congo, Brunei and Sudan, he said. “It would be difficult for these countries to accept even lower production quotas.”

Despite the challenges, Rystad Energy still expects OPEC+ to reach an agreement to reduce production in the upcoming ministerial meeting, said León. This could involve “further voluntary cuts from members such as the UAE, Kuwait, and Iraq.”

“However, we cannot completely rule out the possibility of a deadlock at this point,” he said.